Dunleavy's giant error on Permanent Fund shows need for more conservative approach

The Alaska Permanent Fund ended 2017 with a value of $64 billion.

It begins 2019 with a value close to $61.5 billion, following the worst year for the stock market in a decade.

This makes the plan by Gov. Mike Dunleavy to withdraw about $6 billion from the fund, in part to pay a giant one-time Alaska Permanent Fund Dividend, even more foolish.

When Dunleavy took office a month ago, he was still repeating his claim that the permanent fund had billions of excess earnings that would allow him to fulfill his campaign promises to expand the Permanent Fund Dividend following three years of reductions by former Gov. Bill Walker and the Legislature.

“You pay for the PFD through the $19 billion in the earnings reserve,” Dunleavy told the Anchorage Daily News on the day he became governor. “That’s not a hard one.”

He’s wrong. It is a hard one.

The problem with the Dunleavy $6 billion spending plan is that every legislator with a head for numbers knows that it is reckless. This includes Republicans and Democrats.

A month ago, Dunleavy said the earnings reserve, the amount of the fund that could be spent on dividends, inflation proofing and other uses approved by the Legislature, was $19 billion. He quoted projections that it would grow in the next couple of months and “probably will surpass $20 billion here shortly.”

The future size of the earnings reserve, the portion of the giant savings account that can be spent, rises and falls with investment returns and withdrawals.

The Alaska Permanent Fund Corporation said the earnings reserve contained $17 billion as of Sept. 30. That is the statistic the corporation still posts in a prominent position on its website.

Of that amount, $899 million had already been committed to inflation proofing, meaning that about $16 billion was available, a figure that remained about the same at the end of November.

The principal of the fund, the portion that can’t be spent, was $45.3 billion as of Nov. 30.

A defender of Dunleavy’s numbers, who was shortly to land a state budget job with the new administration, attacked my criticism of Dunleavy’s inaccurate number.

He said when the candidate said the reserve contained $19 billion, Dunleavy was correct because it might contain that much by next July, based on investment projections. That is the wrong approach.

The reserve might contain $19 billion next summer, but if the stock market troubles continue, the account might contain a great deal less than it does today.

No one can say for sure how investments will perform or where oil prices will settle. Any state official claiming to know what will happen this month or this year should admit that much of this is guesswork. That’s why estimates have to include a range of outcomes.

One of the things that concerns me is that there are billions in unrealized gains within the Permanent Fund that could be prematurely turned into cash to bump up the size of the earnings reserve for current political needs. That would damage the long-term prospects of the fund.

There has always been a threat that a governor would pressure the APFC to dump stocks and other assets to swell the size of the earnings reserve. The threat has increased with the new dependence of the state on Permanent Fund earnings.

Alaskans need to watch closely in the years ahead to ensure that the long-term investment horizon of the fund is protected. The fund has nearly $7 billion in unrealized gains that could be turned into cash. It will be hard to tell whether political pressure is unduly influencing investment decisions without greater oversight by the Legislature.

One ill-advised way to pile up $20 billion in the earnings reserve “shortly” would be an immediate sale of holdings that should be held for future growth. Let’s hope that doesn’t happen.

With other large state savings accounts nearly wiped out by the use of $14 billion from savings in recent years to deal with low oil prices, the state must take a more conservative approach to its handling of the earnings reserve than the plan envisioned by Dunleavy.

That starts with accurate numbers and a real analysis of the risks now and in the future.

Dermot Cole1 Comment